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Marriage at Haakon VII’s Gate 1 – DHT to Acquire Saga Tankers
There are certainly many reasons for a merger, but the fact that the two companies’ offices are separated by two floors, while not meaningful, does make the logistics of the transaction easier, even though there are only two employees involved. On a less frivolous note, the proposed acquisition of Saga Tankers ASA by DHT Holdings, Inc. makes perfect sense for both parties. For DHT, it clearly was a means to continue the growth trajectory that began under the new management team and without additional leverage. For Saga shareholders, it can be viewed simplistically as a swift and timely exit. But, in fact, Saga shareholders now have a far better platform to participate in the tanker market.
Discretion Is the Better Part of Valor
When it comes to dealing with shareholder activism, management has to quantify the costs as well as the time and energy consumed in its response. In all these respects, it is unlikely that management can win. It is spending money on lawyers and advisors and remains distracted from the day-to-day running of the company. And so at the end of the day, it generally succumbs to the minority shareholder’s gentle coercion, in polite terms, but what is, in essence, blackmail, in order to do what is best for the company or at least move on. A small company, in particular is doomed to this fate.
This is the position DHT Maritime found itself back in March, when MMI, owners of 9.7% of DHT’s outstanding shares, let its feelings about the quality of management and its decisions be known. All would be well, in their mind, if their expert, Bob Cowen, with his 25 years of maritime experience, were to be added to the board and thus a proxy contest ensued. The issue was resolved this week with DHT relenting by agreeing to expand the board from four to five directors and appointing Mr. Cowen to that new seat, which term expires in 2011. In addition, MMI has the right to nominate an additional director at DHT’s 2011 annual meeting for a term expiring in 2014 and DHT has agreed to support that nomination. In exchange, MMI has agreed to a standstill and will not solicit proxies for or participate in a contested election relating to DHT directors or submit any proposals at shareholder meetings through the completion of the 2011 annual meeting. Importantly, should MMI’s shareholding fall under 5% of the issued and outstanding shares as of the date of the agreement, the board seat will be terminated. And finally coming under the guise of adding insult to injury, DHT has indemnified MMI for its fees and expenses incurred with respect to the proxy contest up to $150,000.
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Catch-22
It’s not only about new money. Keeping your existing credit facilities may soon become a concern. In his recent report on Omega Navigation, Omar Nokta, of Dahlman Rose raised the issue in his discussion of Omega’s credit facility with HSH Nordbank, which is scheduled to expire in April 2011.
While not a pressing problem for most, it certainly is something to be aware of generally, particularly in the case of weaker credits. Shedding assets is a sure way of improving banks’ capital ratios, which is the means to increased lending. Of course, the bigger question is how does one go about refinancing the facility your banker does not want?
The Not So Invisible Hand
In the midst of its 3rd quarter earnings report, General Maritime disclosed that it had entered into a broad amendment of its 2005 credit facility led by Nordea this week. It would appear based upon these disclosures, that the banks are perhaps becoming more proactive in protecting their interests. The time of waiting and seeing what will happen has passed. Simple waivers, if this is an indicator of future trends, will not be granted. Amendments will require reduction of exposure, tighter covenants, and higher costs. But it is the quid pro quo for the amendment that makes this one particularly interesting. The amendment is contingent upon a re-capitalization of the balance sheet through the offering of non-amortizing senior unsecured notes (but with subsidiary guarantees) with a minimum term of five years. The offering must be consummated by November 30th and provide at a minimum net proceeds of $230 million.
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The Inevitable – Taxes and Restructuring
President Obama’s Proposed International Tax Changes – Will They Truly Achieve Economic Stimulation
Tamara Moravia-Israel of Ernst & Young was forthright in views of the President’s proposed changes in international tax law. It is not good for shipping. And there is a question as to whether it will in fact create jobs, stimulate the economy and increase competitiveness as is suggested. First, the “check the box” regime is proposed to be reformed in that foreign eligible entities with a single owner could be disregarded for federal US tax purposes only if: (1) they are organized in the same country in which the owner is organized or created, or (2) a US person wholly owns them (except for tax avoidance cases). The implications of this are potential conversion of first-tier (for tax avoidance) and second-tier (or lower) foreign disregarded entities (FDEs) to corporations that may have US tax implications. Ms. Moravia-Israel suggests that the current check the box regime allows US multinationals to be on somewhat of a level playing field with its foreign competitors. An additional proposed change by the Obama Administration is the deferral of deductions. That is, there will no longer be allowed a deduction for foreign expenses on the US return unless the foreign source income associated with said foreign expense is recognized for US tax purposes. However the biggest threat comes from the Levin Bill, which Congress is potentially currently considering. In effect, the bill puts forth that a foreign corporation is treated as managed and controlled in the US if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the US. If the foreign corporation is considered to be managed and controlled in the US, it is treated as a domestic corporation for US tax purposes. This goes against the traditional determination of nexus, which has historically been the location of board meetings.
Rashomon – As We See It
It began with the movie “Rashomon” and evolved into a concept. “The Rashomon effect is the effect of the subjectivity of perception on recollection, by which observers of an event are able to produce substantially different but equally plausible accounts of it.” Or as the movie asks, who is telling the truth and what is the truth?
Our version of the script calls for a look at Seaspan’s first quarter earnings announcement to elicit the main takeaways. We then turned to our favorite shipping analysts, including Natasha Boyden of Cantor Fitzgerald, Gregory Lewis of Credit Suisse, Omar Nokta of Dahlman Rose, Douglas Mavrinac of Jefferies, Urs Dür of Lazard and Justin Yagerman of Wachovia, for their views and calls. This becomes a very interesting exercise because, as the analyts tell us, there is no company that is easier to model given their strategy to lock-in costs and fix revenues for the long-term.
Delay Or Not to Delay
This week Excel Maritime joined TBS International in choosing to delay its earnings release and conference call for the 4th quarter and year-end 2008 results pending receipt of the necessary waivers. Although it raises some uncertainty, particularly with respect to the status of negotiations, shareholders should take comfort that this conservative approach is appropriate as it avoids the formality of the bank debt being treated as current, resulting in the borrower being unable to meet its obligations and, ultimately, the auditors giving a “going concern” opinion. This domino effect gives the banks a great deal of leverage.
According to a report by Omar Nokta of Dahlman Rose the situation is at best difficult. “Excel’s $1.4 billion credit facility, led by Nordea, has several financial covenants that are either in violation or could be in violation in the coming months. These covenants include fair market value-to-loan, interest coverage, net debt-to-EBITDA and minimum net worth, among others.” The breach of the balance sheet covenants is no surprise given today’s valuations although Mr. Nokta foresees a substantial breech of the net worth covenant as Excel marks to market the Quintana fleet it acquired last year. It does not seem so long ago that the fleet’s value was depressed as a consequence of its below market charters and hence very few showed interest in acquiring the company.
Perhaps of greater concern are the possible breaches of its cash flow covenants. Mr. Nokta suggests that the couunterparty defaults have led breaches of its interest coverage and net debt to EBITDA covenants. Cash balances as of the 3Q 2008 were $225 million and if that level of cash remains the company will have some breathing room although the banks’ assistance, in terms of restructuring the debt, will be required.
Hard Numbers
Moving from the theoretical to the concrete, the following examples illustrate the real cost of today’s crises:
Genco Bites the Bullet
On Tuesday, Genco Shipping & Trading (“Genco”) made the correct but painful decision to cancel the previously announced acquisition of six dry bulk newbuildings, including three Capesize and three handysize vessels, from Lambert Navigation et.al., at an aggregate purchase price of $530 million. As part of the agreement, the sellers will retain the deposits totaling $53 million. The three Capesize vessels and three Handysize vessels are being constructed in the Daehan and Jinse shipyards in South Korea, with deliveries commencing in the 4th quarter 2008 (two Handysize) through 2009.
A True Believer Consolidates and Does Right by His Shareholders
On Monday, George Economou announced a major strategic expansion by DryShips Inc. (“DryShips”) in both its bulk and offshore businesses. First, the company acquired the equity interests, from entities controlled by Cardiff Marine Inc., in nine Capesize bulkcarriers, including five newbuildings for $690 million payable in the form of 19.4 million newly issued shares ($35.50 per share) of Dryships common stock increasing the number of shares to 63 million. In addition, the company will assume $216.3 million of existing debt and $262 in remaining shipyard installments. The latter will be funded by debt facilities in place except for $16 million that will be funded by cash flow. The implied aggregate value of the purchase is estimated at approximately $1.2 billion or approximately $130 million per vessel.
Don’t Throw the Baby Out with the Bath Water or How I Learned to Stop Worrying and Love the Fundamentals (with thanks to Stanley Kubrick)
With a full house, Simon Rose began Dahlman Rose’s 1st Annual Global Transportation Conference confessing that despite Wall Street’s having spent years educating investors as to the difference between period and spot business they have largely been ineffective. We disagree with this assessment believing the current market reflects a herd instinct and an avoidance of betting against the tape. The companies presenting at the conference are all clearly differentiated from spot players, with visibility of earnings and cash flows yet their shares have also been pummeled as the BDI continues its decline. Mr. Rose exhorted the crowd to take advantage of this anomaly, take a reality check and not to trade on fear.
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